Flood of liquidity to sweep away US rating, crude fears

The euphoria over the government finally getting a move-on on reforms is likely to cancel out two key negatives this week.

Renewed tensions in the Middle-East and additional quantitative easing (QE3) in the US  spell higher crude oil prices for India, which imports about two-thirds of its oil requirements. Secondly, ratings agencies are once again crying downgrade for the US.

But the bears, instead of salivating, are likely to drown in the liquidity, following the government’s reforms and easing by the US Federal Reserve and the European Central Bank, suggest experts.

The government announced a reduction in fuel subsidies on Thursday even as the US announced QE3.

The BSE Sensex rallied 443.11 points, or 2.46%, to close at 18464.27 on Friday to cap off an eight-day winning streak.

Foreign institutional investors added Rs2,834 crore to their net purchases of Rs66,041 crore so far this year, according to provisional exchange figures.

The Cabinet then allowed foreign direct investment in retail, aviation, broadcast and in power exchanges in an announcement after the market closed for the weekend.

While markets are likely to cheer the move, not everything is hunky-dory. Brent surged to $117.59 per barrel, while Nymex crude touched $99 per barrel, the highest in four months, on the back of fresh turmoil and anti-American sentiment in the Middle-East.

Also, Egan-Jones, the rating agency which downgraded the US two weeks before Standard & Poor’s, just reduced its rating for US debt from AA to AA- on Friday.

Moody’s Investor Service, too, had placed its AAA rating of the US under watch last week, citing a lack of consensus on resolving budget issues.

Standard & Poor’s had downgraded the US to AA+ in August last year while Fitch maintains a AAA rating on the country.

Devina Mehra, chief global strategist at First Global, said commodity prices are unlikely to head higher.

“We see Nymex crude at $65-75 over the next few months, as the commodity bull market is well and truly broken, which is great news for India, which is a net importer and consumer of commodities. The moves made now will have the direct impact of a stronger rupee. This means that commodity prices will decline even more in rupee terms, further benefiting the current account, the fiscal deficit, local margins....a whole virtuous cycle will emerge,” she said.

Andrew Holland, chief executive officer, investment advisory at Ambit Capital, said the rating downgrade is unlikely to have an impact.

“Most people are aware of the issues and interest rates are so low everywhere. There is unlikely to be any immediate negative reaction,” he said.

He estimates that the market will make at least a 2-3% move immediately. “Sentiment is blinded by liquidity. It is only afterwards that people will get back to fundamentals over growth and the European situation. One may see volatility but it is likely only after a few weeks,” he said.

Markets will also look to the Reserve Bank of India which is set to meet today to decide on rate cuts.